How Do You Fund a Public Sector Energy Upgrade When There Is No Grant to Apply For?

By Alistair Brown, CEO of LumenStream.

Last updated: 3 November 2026

You fund it from the savings the upgrade produces, and you start with the measure whose savings can carry its own cost. For most buildings, that measure is lighting.

The grant route is closed.

The Public Sector Decarbonisation Scheme took its last applications in November 2024, and after the June 2025 Spending Review Salix confirmed there would be no further funding. Across every phase, the scheme received 3,654 applications and made 1,466 grants (DESNZ delivery data, June 2026). That left 2,188 applications unfunded.

This article is for the estates or finance lead at a council, NHS trust, school trust or leisure trust who had a grant bid in mind. It sets out five steps, in a specific order.

Let’s dive in.

Step 1: Stop planning around the next grant round

No new round has been announced, and waiting for one has a cost of its own.

That sounds harsh about a scheme that put £1 billion into Phase 1 and over £1.425 billion into Phase 3. The problem is what the grant did to the decisions around it.

Three things, each from the scheme's own paperwork or from the countries that ran the same experiment earlier.

1. It took the pressure off the payback test. The government's own evaluation of Phase 1 found that recipients felt the grant "removed the pressure on organisations to pursue projects with guaranteed paybacks". A project that pays for itself has to prove it. A project someone else pays for never does.
2. Some of what it funded, a loan could have carried. The Phase 3 evaluation held workshops where several attendees said that for short-payback measures "the business case could therefore easily be made for investment from the organisation's own budgets". Others disagreed. Either way, the scheme was, in its own words, "significantly oversubscribed".
3. It left little room for anyone else's money. We have not found a UK study of this. The European Commission's research centre found the pattern across EU markets in a 2020 review: "The availability of EU and national investment grants hinders interest in EnPC in public sector markets."

The numbers behind the oversubscription are worth sitting with.

Public bodies applied for £7,414,458,603. The scheme awarded £3,719,342,818. Phase 1 offered grants of up to 100% of a project's cost. By Phase 4, applicants had to find at least 12% themselves, and LED lighting was funded only inside a building that was also getting a funded low-carbon heating system.

What three other countries learned first

The UK is late to this.

In October 2026 we were at the International ESCO Symposium in Madrid. The people who run performance-contracting markets in other countries described the same cycle.

1. Slovakia ran grants that covered 95% of a project, by its state investment holding's own account in 2020. Radim Kohoutek, a Czech delegate, said of the neighbouring market: "there was no space for private financing and for ESCO." The UK's Phase 1 grant offered up to 100%.
2. Czechia went the other way. The public sector makes up more than 90% of its signed performance-contract volume, by an industry figure's account in a Czech newspaper in June 2026. In its 2014 to 2020 funding programme, a public body that chose a performance contract got an extra 5% of subsidy. The grant and the private money worked together.
3. Spain spent years on subsidies. A Spanish policymaker described 12 to 15 years of watching the private sector "waiting for the state, waiting for money". Any UK estate that parked its lighting to wait for a Phase 5 knows that feeling.

Where does the UK stand now?

The Climate Change Committee's 2026 progress report says "there is now no dedicated funding for the decarbonisation of the public estate". Budget 2025 went further. The government said it "will consider private sources of finance" to decarbonise the public estate, "alongside or in place of government capital expenditure", and "where these offer value for money". And a June 2026 government factsheet names the routes it has in mind: power purchase agreements, energy performance contracts, and energy or heat as a service.

So the official answer has changed from "apply here" to "pay from savings".

Which measure you start with decides whether that works.

Step 2: Start with the upgrade that pays for itself fastest

Lighting first.

The reason is payback. The Climate Change Committee's 2026 report expects the Treasury's public-private cases to "focus more on energy efficiency and solar installations, which have shorter payback periods, rather than heat decarbonisation". Lighting sits in that first group. It runs every hour the building is open, and the saving starts the day the new fittings go in.

Across 113 buildings, we have cut energy use by an average of 63.5% (as at July 2026). That is the size of saving a funding route can be built on.

Two mistakes put lighting in the wrong queue, and both come from treating it as grant material.

1. Bidding for lighting under a heat-led grant. PSDS Phase 4 funded LED lighting only where the same building was getting a funded low-carbon heating system. A lighting bid on its own was not a Phase 4 bid.
2. Bidding for lighting under the Condition Improvement Fund. The fund's applicant guidance for schools, in both the 2026 to 2027 and 2027 to 2028 editions, says lighting projects that do not address high-need condition issues "are unlikely to be successful in receiving CIF funding as they have a lower priority".

If your lighting upgrade was waiting on either of those, it was never really in a grant queue. It was waiting for a route that pays from savings.

Step 3: Pick the funding route your body is allowed to use

Four routes are open in 2026, and not every public body can use every one.

The table is the start, not the answer. Four checks by body type:

1. Councils can borrow for a measure that pays back inside the asset's life. The constraint is the capital programme the s151 officer already has to fund.
2. NHS trusts should check CDEL cover for any capital route, because capital financed from outside the DHSC group still scores against it. Check that before the business case, not after.
3. School and academy trusts: since July 2026 any solar power purchase agreement has to use the DfE template, and CIF puts condition first, not lighting.
4. Leisure trusts and contractors usually run a building the council owns. In the public-sector project we have delivered, the public body was the signatory on the contract, and the introduction came through a facilities company. The owner's consent comes first.

Does a savings-funded contract sit on or off your balance sheet? It depends on the contract and on your body's accounting rules, and your finance team decides. We would rather talk it through with them than sell you off balance sheet as a feature.

Whichever route you take, the case has to stand on the savings.

Step 4: Build the business case on savings instead of a grant

A savings-funded case needs three numbers: what the upgrade costs, what it saves each year, and what you pay each month.

For example, our model for a leisure centre in the Midlands put the lighting upgrade at £97,575, saving £45,000 a year. Paid outright, that is a 2.1-year payback. Paid as a service, it is £1,626 a month for 60 months, with no interest and no indexation: the same price, spread.

What changes is when the money leaves the building.

The figures are rounded from our own cash-flow model and assume the £45,000 saving holds.

The point for a public body is the first three rows of the outright column. For two years, paying outright puts the estate in the red on a project that is already saving money. A finance committee that has just lost its grant route does not need another two years in the red.

Four questions to ask any provider before you sign, ours included:

1. Is the monthly fee fixed for the whole term, or indexed?
2. Who pays when a fitting fails in year six?
3. What happens to the fittings at the end of the term?
4. What happens if the savings come in below the model?

A provider who cannot answer all four in writing has not finished designing the contract.

Step 5: Use the first project to fund the next

One site's measured savings, already in the budget, are the business case for the second site.

This is the part a grant cannot do.

A grant bid is a one-off: you win or you lose, and either way you wait for the next window. A savings-funded contract repeats. The first site shows the saving on your own bills, and the second site is signed against that evidence.

A city shows what zero capital looks like at scale.

In January 2026, San Diego's council approved a performance contract covering 40 municipal buildings and 36,000 streetlights, with $112 million of bank financing repaid over 25 years. Lindsay Hawes, from the City of San Diego, told the Madrid symposium: "we had no money to put down towards this project whatsoever." The 25-year term is one US bank's. What stays relevant is the starting point: a public body with no capital to put down, and a contract paid from what the upgrade saves.

Lighting is the measure we can show this on today.

In July 2026, Guy's and St Thomas' NHS Foundation Trust appointed a strategic energy partner to deliver energy upgrades as a service, with no upfront capital from the Trust. We are not part of it, and we wrote about what it means for every public estate. It applies the same buy-the-outcome idea to larger measures, and the first such deal was signed only in July.

If your estate is many small sites rather than one large one, the same logic applies in the other direction: several small sites can go in as one project worth financing.